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High-Yield Corporate Bonds: Ongoing Shift Toward Lower Quality

The lowest quality corporate bonds gain as investors stretch for yield.

March 11, 2021


This High-Yield Corporate Bonds sector report is excerpted from the First Quarter 2021 Fixed-Income Outlook.

High-yield corporate bond spreads continued to tighten as investors gained confidence that the economy will eventually make a full recovery. The ICE BofA High Yield index yield fell to historical low of 3.9 percent during the first quarter of 2021 before rising back above 4.0 percent. It was previously thought that the floor on high-yield corporate bond index yields was 5 percent. In each of the last four cycles, bonds have pierced through the previous cycle’s lowest yield, and this cycle is proving to be no different, even if the record low has arrived much sooner than normal. This is owing to the vast amount of policy support that continues to buttress financial conditions and, in turn, has decreased default projections.

Moody’s now expects the speculative-grade default rate to fall to 6.0 percent in 2021 compared to 8.4 percent in 2020.

Accommodative Policies Support a Decline in Default Expectations

Moody’s 12-Month Speculative-Grade Default Rate Forecasts

Moody’s now expects the speculative-grade default rate to fall to 6.0 percent in 2021 compared to 8.4 percent in 2020. We expect Moody’s will continue to downgrade its default rate forecast as the U.S. economy grows well above potential, and as access to capital remains easy.

Accommodative Policies Support a Decline in Default Expectations

Source: Guggenheim Investments, Moody's. Data as of 12.31.2020.

We expect Moody’s will continue to downgrade its default rate forecast as the U.S. economy grows well above potential, and as access to capital remains easy. In the first month of 2021, the high-yield corporate bond market saw $52 billion in debt issuance, a 36 percent increase from last January’s total and the third largest monthly issuance volume dating back to January 2005. The makeup of January issuance also reflects a continued move toward lower quality, with 16 percent of high-yield corporate bond issuance rated CCC or below. This is a significant shift from 2020, when CCC or below issuance represented only 5.8 percent of the primary market.

We also see investors continuing to move decisively toward lower quality in the secondary market as they reach for higher total return potential. In the fourth quarter of 2020, CCC-rated bonds delivered more than twice the total return of the higher-rated BB and B-rated categories, with a return of 12.2 percent in a single quarter, leaving CCC-rated corporates yielding an average of only 8.7 percent, the lowest on record.

CCC-Rated High-Yield Corporate Bond Yields Hit Record Lows

Index Yields by Rating

In the fourth quarter of 2020, CCC-rated bonds delivered more than twice the total return of the higher-rated BB and B-rated categories, with a return of 12.2 percent in a single quarter, leaving CCC-rated corporates yielding an average of only 8.7 percent, the lowest on record.

CCC-Rated High-Yield Corporate Bond Yields Hit Record Lows

Source: Guggenheim Investments, ICE Index Services. Data as of 1.22.2021.

We think some of the rally in CCC looks overextended and would look for better value in the single B rated or higher space, where fewer deeply distressed situations exist. Broadly speaking, we continue to view selloffs as an opportunity to add to risk.

—Thomas Hauser, Senior Managing Director; Rich de Wet, Director

 
Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

©2021, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


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Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.